Significant achievement

After Wednesday's proceedings in the Lok Sabha, the Bharatiya Janata Party government is on the verge of rolling out the goods and service tax (GST), which could potentially turn India into a common market. It is the biggest indirect tax reform since Independence. The lower house on Wednesday passed the last batch of four bills required to implement this historical piece of tax reform—central GST bill, the integrated GST bill, the GST (compensation to states) bill and the Union Territory GST bill. With these bills tabled as Money Bills, all the government has to wait for is recommendations from the Rajya Sabha that it does not have to consider necessarily. In other words, the government will be able to pass these bills in Parliament before the end of the current Budget Session on April 12. Following the passage of these four Bills, each of the 29 states and two Union Territories would be required to pass their respective State GST laws. Intended to subsume many of the Central and state indirect taxes, the goods and services tax is expected to transform the indirect tax structure. Today, there is a plethora of taxes and levies imposed goods and services by state governments and the Centre, including octroi, excise and service tax. This places an excessive burden of indirect taxes on the common man. The GST envisaged by a statutory council of Central and state Finance Ministers (GST Council) empowered to administer the tax is a far cry from the One Indirect Tax, One Rate and One Registration motto first articulated by the Centre. It has now become an indirect tax system with four tax rates and numerous exemptions. Both the Centre and States will simultaneously levy GST across the value chain.

Nonetheless, the system proposed by the NDA government is an ambitious overhaul of India's labyrinth of indirect taxes, making it seemingly more conducive to both businesses and the consumer, while also encouraging transparency. It aims to significantly improve governance by creating a proper and straightforward paper trail of transactions across value chains, thereby reducing the scope for corruption. Coherence and simplicity are the two virtues that businesses seek. Without these features, there is little incentive for businesses to invest here.

As argued in these columns earlier, the legislative work behind the potential rollout of GST is something the BJP government can peddle as a significant achievement. Unlike demonetisation or the recent Finance Bill, the success behind GST is not merely backed up by its brute Lok Sabha majority, but months of collaboration, deliberation and persuasion with various stakeholders. For starters, the Centre managed to pass the GST Constitution Amendment Bill through both Houses of Parliament last August—the first major step towards paving the way for its rollout. That is not to suggest that the introduction and passage of the subsequent four bills in the Lok Sabha was a cakewalk. Following the adoption of the Constitutional Amendment, Finance Minister Arun Jaitely had to organise many meetings of the GST Council spread over many months. Any measure passed by the council requires a three-fourths majority. There were expectations within the government that the Council would be able to reach an agreement on certain contentious aspects of the four GST bills by December 2016 (Winter Session of Parliament). Among the controversial issues that members of the Council could not agree upon was the division of taxation powers and the compensation that States would receive from the Centre. On expected lines, the Council was unable to arrive at an agreement, and the Centre failed in its attempt to roll out GST by April 1, 2017, the start of the financial year. After crossing the final hurdle, however, the likelihood of seeing GST rollout by July 1 seems eminently possible. It will not be all smooth sailing, and much will depend on the clarity the government will offer regarding the fine details of the bills. It is hard to envision how far it will positively impact the economy since the new indirect tax system fundamentally changes the way the Indian economy functions. There will be some initial growing pains with clarity still elusive on certain aspects of GST. Moreover, there are some drawbacks that both the States and Centre will have to address soon.

One way of looking at the GST Council is its intrinsically federal nature. But any measure that States want to push through requires a three-fourths majority. Evidently, this makes it harder for individual states to tweak their taxes for specific conditions that may arise within their jurisdiction. There are also certain provisions introduced in these Bills like the anti-profiteering clause, which some experts contend raises the spectre of inspector raj. "The Central government may, by law, set up an authority to examine if reduction in tax rate has resulted in commensurate reduction in prices of goods and services," says PRS Legislative, a research firm. "The Authority may impose a penalty if prices have not been reduced." Companies, however, argue that prices are not merely dependent on tax rates, but other factors like input costs, competition in the market, among others. Finally, the Goods and Services Tax Network (GSTN), a special purpose private company established to provide IT support to streamline the implementation of the new tax regime, is in direct confrontation with the Comptroller and Auditor General of India, for its refusal to share details of taxpayers' information on its database for an audit, as per latest media reports. The government only holds 49% ownership of the GSTN. It's been more than 16 long years since former Prime Minister Atal Bihari Vajpayee first set up a committee to design a model for the goods and services tax. As the various stakeholders iron out these contentious issues, it is the Modi government, which will finally make it a reality.